Thursday, 18 December 2014

Cost-benefit analysis and impartial umpires

In contrast to his fiscal rules, Osborne has had enormous success with his greatest fiscal innovation: the Office for Budget Responsibility (OBR). It was created in 2010 and has been successful in curbing the problems of over-optimistic forecasts that plagued the Treasury through the 2000s. Its ruthless transparency has lent credibility to the government’s plans and, in only a few years, it has grown in stature to the point that it can openly rebuke the Prime Minister and force changes in the Budget with its forecasts.

Expanding the role of the OBR, commensurate with its growing stature, would help overcome the fits and starts of UK fiscal policy. Where rules are fragile and inflexible, institutions grow and evolve in response to circumstances. As the OBR continues to perform effectively and its credibility rises, it can sustain a greater burden of responsibility for holding the government to account. Already, it has cross-party respect and support: last year, the shadow chancellor Ed Balls asked it to inspect the budgetary pledges of each major party ahead of the election. That is surely a good idea.

Assessment of opposition and government policies is a role already performed by similar bodies overseas, such as the Dutch CPB. The CPB is nearly 70 years old and has gradually taken on a central role in analysing the implications of election manifestos and Budget promises. In America, the Congressional Budget Office has also expanded its purview over time. Both provide indispensable analysis of the implications of the government’s policies and proposals, describing the trade-offs and estimating the costs.

I'd love such a body to act as clearinghouse for cost-benefit analyses. Regulatory Impact Statements vary in the quality of cost-benefit analysis; there are always ways of getting the number over the line if the Ministry's particularly keen - just consider the Australian East-West rail road link. You need an impartial arbiter to make sure that the cost-benefit analyses are being undertaken to a common standard across Ministries.

Further, since few Ministries have in-house capability to conduct these analyses, they often have to outsource it to private consultancies. At least one of these consultancies has a reputation for providing the number that the client wants rather than one that's sound. But Ministries can't pay the piper unless they know the tune, or unless somebody who can read sheet-music has a look over things afterwards.

Here's a simple rule that could work. Submitted Regulatory Impact Statements would be required to include a cost-benefit analysis for any rules with substantial effect. That cost-benefit analysis must be vetted by Treasury, or by a new Fiscal Council, with enough of the workings provided by the Ministry or the consultants to allow for replication and sensitivity tests. Treasury is working up new guidelines for cost-benefit assessment; that would be the benchmark. If the cost-benefit analysis fails to pass muster, it's sent back to the Ministry. And consultancies that produce cost-benefit assessments that fail to meet the standard more than, say, one time for every ten reports produced, are put on a naughty sheet barring Ministries, government agencies, SOEs, local governments, regional governments, or any other part of the government I've missed here, from engaging their services for a few years.

Further, for a cost-recovery fee, that same agency should be able to vet analyses produced for private sector clients. A failed report there could get the tagline "Had this been produced for the public sector, the consultancy producing it would be barred from producing further analyses for any government agency for two years." And that tagline could follow it in all public discussion of that report.

I think the naughty sheet would do a lot to improve the standard of cost-benefit analyses in New Zealand.

Surely rather than a naughty sheet, it would be simpler for such an agency to just publicly announce its findings? If you're a firm that is repeatedly and publicly slapped around for the quality of your reports, you will very soon begin to see your business dwindle, regardless of a blacklist.

Nope. You've misspecified the market. If the market ultimately were convincing bureaucrats and Ministries, you'd be right. If the market is instead getting a dodgy 5 second soundbite on Radio NZ inflating (deflating) some problem, then the slapping around is useless. You need something stronger.

Are so. One can always find ways in which a cba is deficient, just as a policeman who doesn't like the look of you can always find some way in which your car or your driving is breaking some rule, and so these people would be able under the arrangement you suggest here, to keep sending things back to Ministries and so prevent papers and proposals that they didn't like from being submitted to Cabinet. Civil servants are already supposed to make sure the advice they offer to Ministers is without fear or favour, and as well formed and evidence based as can be, and if you think they don't because they're biased, or because they're too susceptible to Ministerial pressure, then why would this new arrangement do any better?